Texas Expands Sales Tax Nexus

The Texas Legislature recently passed House Bill 2403 that expands the state’s sales tax nexus provisions by expanding the definition of a retailer doing business in the state. Under the new law, an out-of-state retailer would be required to collect and remit sales tax even where its distribution facilities are operated by subsidiaries. The bill was written to clarify existing Texas sales tax law as to when an out-of-state retailer has physical presence in the state and thus has a requirement to collect sales tax on sales to its customers in Texas.

Several months ago, Texas sent Amazon a bill for $269 million for several years of uncollected back sales taxes. Amazon thereafter asked for an exemption from sales tax collection, arguing that it lacked physical presence or nexus, as required under the Commerce Clause of the U.S. Constitution. Amazon claimed that its warehouse operation was incorporated as a separate company and operated independently of Amazon’s retail operations. Amazon failed to reach an agreement on the issue with the state comptroller’s office and has since announced that it will close its distribution centers and not expand its fulfillment centers there.

HB 2403 provides that a retailer is “engaged in business in this state” and is thus responsible for collecting sales tax if it has “substantial ownership interest” (defined as at least a 50% ownership interest in capital and profits) in a subsidiary that operates facilities like distribution centers, warehouses or similar locations to support its sales. The Texas bill was sent to Governor Perry for his signature last week. If signed, these provisions would take effect January 1, 2012.

Kansas, Oklahoma and South Dakota have already enacted similar laws. More and more states are looking for ways to generate revenue and are looking to this type of legislation to address strategies among retailers to separate some operations into subsidiaries in order to avoid collecting sales tax. Under these expanded nexus provisions, an out of state retailer may suddenly find that it has nexus with a state and be required to charge, collect and remit sales tax there.